Author Topic: Help w/ ROI Calcs for a basket of sample properties plz  (Read 3987 times)

Joet

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Help w/ ROI Calcs for a basket of sample properties plz
« on: April 30, 2013, 10:58:45 PM »
Looking at picking up ~5 or so SFH's that are around $200k/ea, and would rent for ~1500+

For the down payment, I could take an equity loan from my current residence of $200k @ 4% [would put me at 60%LTV]. Payment on this 2nd mortgage would be right at $1500/mo.
Total debt:income ratio would be a bit under 40% if I were to do this.

Each property would be ~40k downpayment [20%], financing each property as non-resident owner [+0.375 APR] puts me around 3.875%-30 for a payment of ~$750/mo. Throw in property tax/insurance and it's around $1000 [est]. Throw in a property management company [$100/mo] and it will clear ~$400/mo net per property.

Say income taxes on this in my tax bracket [33 fed/9.3 state] is about 30% effective=$27k/yr income taxes paid on $90k in rents.
However I can write off the interest paid on the 2nd mortgage and all 5 of the income properties. Back of the napkin guesstimate on this is [~50k in mortgage interest to deduct] @ my global ~25% effective tax rate means I should be able to knock off ~12.5k of the 27k as a deduction. Throw in the additional property tax deduction and thats probably another 10k---sounds like a wash more or less. I guess taxes would eat approx ~$500/mo or so to be accurate [100 per property]
Although I'm well into AMT zone already---not sure how that affects this picture.
So my guess is the tax picture is roughly equivalent before getting into depreciation?

Then if my 5* mortgage+property tax+ insurance +management fee + [effective tax] = $5500/mo debt,
Vs rents of $7500 worth of rent payments = ~$2000/mo generated cash flow [assuming zero vacancies/repairs/maintenance/legal problems/etc]

But then theres that 2nd mortgage note to pay: $1500. So all in, the cashflow assuming 100% occupancy gives a $500 return/mo. I'm guessing thats pretty close to a maintenance budget for even a single of these properties.

So the #'s don't work at all in this case? Am I missing anything?

I've never looked at being a landlord before as rents in my area dont make any sense [super negative cashflow everywhere]. But in another big city in my state I found these types of SFH's for sale in a downtown area and I estimated the rents with some craigslisting and googling. I'm probably conservative. Perhaps they could rent around $1800.

But is that a general guideline? Rents need to be ~1.5-2x the mortgage+property tax to make any sense? Just looking for a critique of my super basic analysis here---I've never tried this before.
Perhaps I could just move some $$ around and eliminate the home equity loan for the down payment[s), makes the cashflow perspective look a bit better. Aka rather than ~$500 mo in this scenario it would look like ~$2k/mo. In this case the price:rent ratio is 11.11

Would the Cap rate then be in the case where I just use 200k from taxable portfolio for the downpayments be [just using one of the 5 since they are identical for my purposes]

[Net operating income = 300/mo * 12 = 3600], aka 1500- 100 property mgmt, -100 taxes
[Net cost = 200k/5   =40,000, from the downpayment]
Or Cap rate = 9% on an annualized basis

Is that the right way to use cap rate? Or would I look instead at the entire property:
200,000
Then put that against the total rent [net of costs] = $15,600 [1300/mo]
=7.8%

Would I then also look at the opportunity cost of the funds? Eg a conservative 5% return or something in the equity market [or perhaps a more historic ~7% or so for the S&P 500]. But then I'm not factoring in equity in the properties, deprectiation, or maintenance. Perhaps a wash.

Thank you, sorry for being a noob. What am I not looking at? Do these properties make sense at all in any scenario as an investment?[ assuming they arent money pits of deferred maintenance or structural problems? ]

thank you,
« Last Edit: April 30, 2013, 11:10:17 PM by Joet »

Hamster

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Re: Help w/ ROI Calcs for a basket of sample properties plz
« Reply #1 on: May 01, 2013, 12:18:41 AM »
Without getting into the numbers at all, one quick comment is that under standard underwriting, you can only have a total of 4 mortgages. Once you get to the 5th mortgage, there is a new set of underwriting requirements. I'm typing on my phone, so hard to link to specifics, but a google search for 5-10 properties program should get you there.

Another Reader

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Re: Help w/ ROI Calcs for a basket of sample properties plz
« Reply #2 on: May 01, 2013, 07:53:38 AM »
Ah, another high salary income person who just woke up and realized his income is the tax vultures' favorite easy meal....

It's clear from your post you don't understand real estate investing or the income tax.  Buying these properties would be a terrible idea, for a number of reasons.  Start by reading this blog, http://bawldguy.com/.  You might even give Jeff a call, because he deals with folks in your situation every day.  He can give you the five minute education on what you can and cannot accomplish with high salary income.  A call to your CPA to discuss real estate investing and your tax situation is also a good investment.  You should also familiarize yourself with active real estate investing.  Read the Bigger Pockets blog for starters, http://www.biggerpockets.com/renewsblog/.

All I can say about your proposed approach is that it will certainly put a dent in your wife's spending....

Joet

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Re: Help w/ ROI Calcs for a basket of sample properties plz
« Reply #3 on: May 01, 2013, 11:29:57 AM »
ok thks, I was just hoping for general guidance for my assumptions regarding net cashflow/ROI
only thing I saw from the baldguy after clicking on some of his VODs was that mortgage interest gets applied against rent(s), which I think is pretty close to my assumptions above [in fact, that was my calculation], I just took it a step further regarding effective tax rate(s) from my 2012

thanks for the feedback tho, I guess I'll poke around and try to learn my error(s) elsewhere.
Perhaps one conclusion I have drawn in the little research I've done is it's better to start slow. Pick a single rental, do a little R&R, get it out of deferred-maintenance/money-pit status, maybe put up to 50% down on it to make the cashflow look better, and then slowly grow.

also the web seems to have abundant graphs/charts/heatmaps with respect to various price:rent ratios in various markets
Looks like the markets kicked in the teeth the hardest [vegas, south florida, phoenix] have the best #'s currently. Tho I'd be afraid about vacancy/rentals in those areas too. I'm sure that's a simplistic argument, of course.

Johnny Aloha

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Re: Help w/ ROI Calcs for a basket of sample properties plz
« Reply #4 on: May 01, 2013, 12:57:01 PM »
I agree with Another Reader.  I wouldn't touch those deals.

Check out BiggerPockets.  And there are some good posts and comments in MMM blog and forums.

Start with:
- 50% rule
- 1% rule (really 1.5% or more though)

Then, once you are aware of some rules of thumb, you can decide if you want to follow them! 

Also consider why you are investing.  Cash flow?  Potential appreciation?  Equity build up?  Happy hour discussion topic?

Another Reader

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Re: Help w/ ROI Calcs for a basket of sample properties plz
« Reply #5 on: May 01, 2013, 01:05:41 PM »
It does not sound like you looked at the blog very carefully.  I think you should call Jeff and get the 5 minute (or 30 minute) education.  He loves to talk to people in your shoes, and he has doing this for 40 years.  I don't invest through Jeff, but I do like to float an idea by him every once in awhile because of his knowledge and experience.

wilk916

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Re: Help w/ ROI Calcs for a basket of sample properties plz
« Reply #6 on: May 01, 2013, 01:06:44 PM »
But in another big city in my state I found these types of SFH's for sale in a downtown area and I estimated the rents with some craigslisting and googling. I'm probably conservative. Perhaps they could rent around $1800.

What city?

Hamster

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Re: Help w/ ROI Calcs for a basket of sample properties plz
« Reply #7 on: May 01, 2013, 03:49:58 PM »
I believe the 1% rule is an EXTREMELY blunt instrument.

Depending on the specifics, $1500 (or better $1800) could barely work on a $200k property if you have a situation where expenses are going to be extremely low (self-management, good interest rate, no HOA, tenant pays all utilities, relatively new property with no repairs or upgrades imminent).

If you bought a $200k home with $40k down (assuming no closing costs...), you'd need to cashflow $3.2k per year to have a 8% cash return on your cash investment. In your case the HELOC hurts you.

That is a monthly net of just under $270 per month after ALL expenses. If you could get rent of $1800 per month, then you'd need total expenses (including deferred maintenance, management fees, utilities, etc, etc) to be below $1530 per month. After $750 for P+I on the mortgage, that leaves $780 for everything else (taxes, insurance, vacancy, repairs, deferred maintenance, etc, etc). All those expenses are very location, tenant, and property-dependent.

If you only brought in $1500 per month rent, those same expenses would need to be below $480 (probably not possible?) to hit 8%. 

On the plus side, there's also equity accumulation - $2800 principal paydown in the first year based on that mortgage (although if you do sell, you're going to spend 4 years or that equity in transaction costs/commissions), and tax benefit (although depreciation is recaptured when you sell, so it is in some ways more a deferral than a deduction).

Can you do better than that? Sure you can. But that's also nothing to sniff at. What is your alternative investing plan (i.e. opportunity cost) for that money? You can certainly do better than $1500 rent on a $200k property, but you could actually earn a reasonable return with the right property/location.

I definitely agree with starting with one property.

[Edit] mis-stated net operating income
« Last Edit: May 01, 2013, 05:13:13 PM by Hamster »

en dub

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Re: Help w/ ROI Calcs for a basket of sample properties plz
« Reply #8 on: May 01, 2013, 04:16:38 PM »
A couple of points:

 - First, congrats on considering real estate as an investment

 - You might try looking a little further out of town. 200k is too much house if it only rents for $1500/mo but I only really know my market. In my area, you can find a 100k house which rents for $1000 - $1200.
 - Price:Rent is just that: Price of the house vs the total Rent and doesn't change based on how much you finance
 - Someone mentioned the rules around 4+ mortgages: Generally you need to have more cash reserves (6 months PITI per property) to qualify for that 5th mortgage.
 - Net Operating Income is before debt service (mortgage payment). So if we use the 50% rule, that's $750/mo or $9,000/year making the cap rate 4.5%. You could do a lot better but maybe not in your area.

Like you said, none of this analysis factors in the other benefits of property ownership: appreciation, depreciation, principle pay down. And it shouldn't: those are the icing on the cake. The cashflow is the cake and it's not worth it on these properties.

The Bawld Guy would have you take that 200k HELOC and go buy a bunch of duplexes in Texas. That, to me, sounds like a better plan.

arebelspy

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Re: Help w/ ROI Calcs for a basket of sample properties plz
« Reply #9 on: May 01, 2013, 04:38:58 PM »
The Bawld Guy would have you take that 200k HELOC and go buy a bunch of duplexes in Texas. That, to me, sounds like a better plan.

Really?  I was under the impression SFRs was what the market was giving there right now.  You're sure he's on the duplex thing right now?
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Another Reader

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Re: Help w/ ROI Calcs for a basket of sample properties plz
« Reply #10 on: May 01, 2013, 04:42:34 PM »
High end duplexes with two car garages and separate tax parcels, last I checked.  $250-$275k purchase prices.  South of DFW and in Austin, IIRC.

MrMoneyPinch

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Re: Help w/ ROI Calcs for a basket of sample properties plz
« Reply #11 on: May 01, 2013, 04:46:23 PM »
Looking at picking up ~5 or so SFH's that are around $200k/ea, and would rent for ~1500+

For the down payment, I could take an equity loan from my current residence of $200k @ 4% [would put me at 60%LTV]. Payment on this 2nd mortgage would be right at $1500/mo.
Total debt:income ratio would be a bit under 40% if I were to do this.

Each property would be ~40k downpayment [20%], financing each property as non-resident owner [+0.375 APR] puts me around ...
Whoa there.   If you are able to swing 5 houses for starters, you should look around for multi-unit buildings.  The unit price would be lower, so the numbers would be better for you.  I know most people think of slums when you say multi-unit, but nice or extra-fancy ones are also avaliable (with tenants to match).  A nice 6-8 unit is much easier to manage than 4-5 separate houses, except if those are all located on the same block!

Also, debt:income is only useful for personal property and 5 units is clearly out of this realm;  when you become an investor the bank will look at the properties' numbers instead of yours.

As for taxes, as a rule of thumb assume than it is the income net of ALL expenses (mortgage, repairs, insurance, advertising, etc.) that gets added to yours.  For more precise info get a tax guy, as there are deductions for technical reasons avaliable.